Paleoconservative Observations

Some Sensible Proposals for Regulatory Reform

Just as we don’t allow strangers to take out life insurance policies on those to whom they have no real relationship, it would be appropriate to scale back the huge credit-default-swap markets to those who are actually parties to the underlying transactions. What has happened instead is that a secondary markets many times bigger than the real markets purported to be insured have developed, creating paper obligations and exposure greater than the entire world economy. George Soros opines on this matter sensibly in yesterday’s Wall Street Journal, suggesting that until this is resolved and CDS is brought down to earth, the threats of “systemic risk” will remain from this newfangled financial instrument.

Along these lines, Hernando de Soto suggests that clear property rights are important to avoid fraud and the lack of transparency in commercial paper markets, and that some public registry of various paper assets (much like UCC or real property registries in US states) would smooth out some of the confusion generated by MBS and ABS assets. His analysis makes a great deal of sense since some MBS holders, it turns out, do not have clear title to the security, can’t easily identify and examine the collateral their paper is putatively secured by.

Sadly, our political class is more interested in peacocking about bonuses, when the real problem has been the decoupling of Wall Street’s activity from generating productive economic assets, its penchant for creating impossible-to-value byzantinely-complex financial instruments, and the perverse incentives from the combination of loose money and accounting rules that allow banks and bankers to get paid today while shift the cost to others (lately the taxpayers) tomorrow. Some attempts to reduce the scale, increase the transparency, and align incentives in the financial industry more closely with the public good would make a great deal of sense. Outright attacks on property, pay, and the basic profit motive, of course, are very dangerous and hurt the most productive classes and productive corners of the economy in general, most of whom work far from Wall Street.

So long as Obama, the Congress, and various interests aim to switch rules in midstream and threaten to micromanage every aspect of business, nothing done to reform and recapitalize banks will work, because these efforts will be eclipsed by the infinte costs imposed on potential borrowers in the form of uncertaity, redistribution, and the anti-productivity pet issues (like capping carbon emissions) of Obama and the far left.

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7 Responses

I understand how the insurable interest requirement works in life and fire insurance to prevent people from taking out a policy on you and then setting your house on fire.

But wouldn’t there be a socially beneficial angle to letting outsiders place bets in terms of increasing information? Let’s say you are in AIG’s Financial Products division in about 2004 and somebody from Goldman Sachs comes to you and says they are thinking about buying a whole bunch of mortgage-backed securities originated by Countrywide, and his boss is being overly cautious and wants to insure them against default. So you fly out to California and play golf at Sherwood Country Club with Countrywide’s Angelo Mozilo and decide he’s a great guy, so you’d love to insure Goldman’s Countrywide MBSs against default.

The day after you do it, you start getting calls from hedge funds saying they want to get in on the action too, that they’d love to bet you that the Countrywide MBSs that Goldman bought will go belly up.

Apparently, AGIFP’s reaction was to say, “Ha! A sucker is born every minute! Bring it on!”

But you might think that a more normal entity would start to say, “Uh, oh, maybe all these hedgefunds know something about Countrywide MBSs that Goldman didn’t tell us? Maybe we should hedge some of these bets the other way with other firms and charge higher prices on MBSs in the future?”

Granted, it apparently didn’t work that way with AIG, but it would seem like having multiple participants in the market would generate more information than just bilateral arrangements.

I think you make a good point. Along those lines, I’m a little surprised that they didn’t do it bookie style, i.e., moving the line so that there is equal action and mutually cancelling obligations between one person and another on any given CDS obligation. But this too should require ponying up reserves by the people on either side of the transaction for a clearing house like Lehman, for example.

Yes, how nice it would be if financiers only made “sensible” investment and did not use Excel, Quicken, C++ and Mathematica to create “overly complex” financial transactions.

What a wonderful world that would be.

And how about that Big Other, who was George Bush and now (eek) is de black man she done been lovin’?

It’s a tough world.

To say that marginal people without resources should not use their brains to provide people what those people think they want and need (arcane loans) is a root of anti-Semitism. It’s *Kitsch* masquerading as philosophy, since as in *Kitsch*, the cracker-barrel libertarian or “real” conservative reasons, not about real people, but about images, such as the graven image of the Revolutionary War soldier on the village commons.

And it is the zenith of Folly to mulishly deny that de black man she done been lovin’ ain’t your friend. Trust me, you need one.